United Parcel Service: Buy, Sell, or Hold?

United Parcel Service (NYSE: UPS) is trading at multi-year lows after reporting second-quarter earnings, including a shocking drop in operating profits and lowered guidance for 2024. With the stock now more than 40% below its all-time high, investors must decide whether UPS is a bargain or a falling knife.

Earnings weren't all bad; management expects them to return to growth later this year, and the company just posted growing package volumes in the U.S. for the first time in nine quarters. The dividend also yields over 5% now, a bonus for owning the stock.

Is it a buy, sell, or hold? It might depend on one crucial risk factor within UPS that could dramatically hurt its profits. Here is what you need to know.

Why did UPS stock plunge after earnings?

Investors need only look at the top and bottom of the earnings report to see why shares plummeted after the release of second-quarter earnings. The top featured disappointing headline numbers: Revenue came in at $21.8 billion, missing analyst estimates by $440 million.

Meanwhile, UPS earned $1.79 per share, $0.20 short of expectations. The company trimmed its full-year revenue guidance to $93 billion after estimating it could go as high as $94.5 billion the previous quarter. Management also lowered profit margin estimates for 2024.

So, what went wrong? Some good things happened, especially in the United States, where package volume grew for the first time in nine quarters. Revenue declined slightly year over year, but only because of product mix. The culprit was a 30.1% drop in operating profit from the prior year due to front-loaded costs associated with a new labor contract UPS had negotiated with its unionized workers.

Management expected these front-loaded costs, and also expects to resume growth in operating profit. Still, it seems that profits dropped more than expected, not only because of the $0.20 shortfall on actual second-quarter earnings per share (EPS) but also because of the guidance adjustment. Management revised its expected 2024 operating margin to 9.4% from a range of 10% to 10.6% just three months earlier. That's a big swing in a short time.

How does unionization affect UPS versus its competitors?

Investors shouldn't underestimate the labor situation and its potential long-term impact on UPS. Studies show that unionized workers make more and enjoy better benefits and workplace protection, but unionization drives up operating costs.

A 2018 study by consultancy Adams Nash Haskell & Sheridan estimated that unionized employees cost companies $47.29 per hour versus $32.81 for non-union employees, a 44% difference. This can be a disadvantage for UPS compared to its competitors because the Teamsters, the union that organized UPS employees, have failed to do the same at FedEx and Amazon .

On its second-quarter earnings call , management said that it expects to exit 2024 with a 10% operating margin and increase that to 12% over time. It's worth noting the company's operating margin has struggled to stay above 12% throughout the past decade, so it's not a sure thing.

Is UPS a buy, sell, or hold?

Management has played it off as a temporary setback, but analysts don't seem very convinced. Estimates for long-term earnings growth have plunged roughly 50% since the quarterly report. The stock's decline has pushed its forward price-to-earnings (P/E) ratio down under 17, which doesn't look appealing in the face of lower growth expectations:

UPS EPS LT growth estimates; data by YCharts . LT = long term.

While dividend investors might salivate over the stock's 5% yield, it seems to reflect a riskier stock more than a bargain -- the drop in profits wiped out a lot of free cash flow . As a result, the company's dividend payout ratio is nearly 100%. That needs to change, or a dividend cut could come.

UPS is a household name and plays a crucial role in the economy as a logistics powerhouse. It must show investors that its second-quarter woes were a blip and not the beginning of problems after its new labor deal. Investors should consider selling or avoiding the stock until then.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and FedEx. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy .